New at Reason

July 17, 2007

Ronald Bailey peers into the future of "political peak oil" and tries to ascertain what you'll be paying at the pump.

Comments

|7.17.07 @ 7:47AM|#

You know, Ron, about two months ago you wrote an article quoting some "experts" who said that oil prices would be coming down. Perhaps this article will prove to be equally prescient. But I suspect not. Higher fuel prices will force conservation (good), hurt U.S. auto companies, who specialized in big cars, thus making the Democratic Party even more "populist" (bad), and boosting the influence of countries like Russia (bad). I guess it's about time for scientists to invent that cheap gasoline substitute we've all been hoping for.

|7.17.07 @ 8:07AM|#

You mean like this?

|7.17.07 @ 8:09AM|#

There is a cheap substitute for gasoline, it's electricity. When vehicles run on iron tracks energy input is much lower than in cars.
Rail transport has been a well known technology for decades and can significantly contribute to energy conservation, even if it is not as convenient as an individually driven car.

|7.17.07 @ 8:14AM|#

Dear Americans,

While many of you have noticed that the price of oil has been rising, it seems to have gone unnoticed to almost all of you that prices of everything have been rising, from grains to metals, from wages to rents. A large amount of the price increase is attributable to the ongoing depreciation of the US dollar.

Your greenback is currently trading at lows against other sound currencies such as the Euro, Pound, Swiss Franc, and Canadian and Australian dollars. In fact, your money is also losing value against second rate currencies like the Mexican peso, the Brazilian real, the South Korean won, the Chinese yuan, and the Indian rupee. A declining foreign exchange rate with trading partners drives up the cost of your imports, which translates into higher retail prices (a.k.a. inflation)

When pondering reasons for the decline in value of your paper money, consider the magnitude of the combined fiscal and trade deficits that your country has been running for the last decade, as well as the precarious amounts of debt carried by your households, corporations and governments. All of this borrowing has effectively increased the amount of your available money supply.

Expect prices of oil and all other tangible commodities to continue to rise in US dollars, until you collectively sort out your nation's sorry excuse of monetary policy.

Sincerely,
the rest of the world

Sandy|7.17.07 @ 8:47AM|#

Dear rest of the world,

That trade deficit thing will pretty much be erased by the lower dollar. You've a point about the deficit spending, though there's little proof it's seriously affecting capital markets yet.

Thanks,
America

|7.17.07 @ 8:52AM|#

A declining dollar will make the trade deficit worse before it gets better.

Sandy|7.17.07 @ 8:52AM|#

Let x be the number of politicians who deplore global warming and argue we must Take Action.
Let y be the number of the politicians who deplore global warming who also decry rising gas prices.

Let z be equal to the number of politicians worth listening to.

This is easily derived:

z = x - y

Empirical work may have some difficulty finding a nonzero integer for z, especially if you subtract n, the number of politicians who are not part of the two major factions in American politics.

Sandy|7.17.07 @ 8:54AM|#

Russ R: You have just discovered that substitution is not instantaneous. You may also discover that policy implementation is not instantaneous, and unintended consequences are surprisingly common in policy implementation.

For examples, I refer you to immigration policy.

|7.17.07 @ 9:04AM|#

I don't believe that x and z intersect.

|7.17.07 @ 9:05AM|#

rising oil prices are something that will have to be adjusted to. My hope is that the overall slope of the increase is low so we have time to switch over to more efficient/alternative technologies so the economy isn't seriously depressed, but whether or not it is, we're going to have to adapt to a world using more of a limited source of energy. I hope the US will wise up and start investing heavily in nuclear power, but politicians and NIMBY's being what they are, I'm not holding my breath. All I can say is I will endeavor to minimize the impact on myself, but there will not being any quick fixes to this problem.

|7.17.07 @ 9:14AM|#

L_I_T:

Substitution can only be effective if prices of alternative fuels rise at a slower rate than the price of oil.

So far, this hasn't been the case (e.g. see uranium.)

Jason|7.17.07 @ 9:27AM|#

According to the laws of economics, when the price of somthing rised, more people produce it, bringing the price down; thus, mathmatically we can never run out of oil, the supply is infinite.

|7.17.07 @ 9:32AM|#

Russ,

Keep in mind that per lb, Uranium contains a great deal more energy when used in nuclear facilities than oil to produce electricity, so there is a multiplier involved in the comparable slopes.

Also, there is very little uranium production right now, so you're comparing a rise in a commodity not heavily invested in currently to one that has been ramping up over several years.

|7.17.07 @ 9:33AM|#

Jason,

Brilliant!!!! Now we just need to create and decompose more pre-cambrian plant life pronto!!!

|7.17.07 @ 9:46AM|#

AV: (Chagrin) Well actually, the "experts" I quoted turned out to be correct--at least in the short run. Gasoline prices did decline shortly after my 2nd article on the topic. However it must be acknowledged that the experts were wrong when I quoted them in the first article.

The current gas price woes are once again being blamed on refinery outages in the midwest.

BTW, the IEA report quoted in the current column also projects that investment in refinery capacity will lag behind demand which will mean that gasoline supplies will be tight around the world for the allegedly foreseeable future.

robc|7.17.07 @ 9:55AM|#

Ron,

I found your disclosure interesting. The last time I calculated (probably about a year and a half ago), my XOM investment had more than covered my increased gas prices (but probably not increased prices on other goods due to rising transportation costs). My position is a (slight) bit bigger than yours however.

|7.17.07 @ 9:58AM|#

robc: When did you buy your XOM shares? :-)

robc|7.17.07 @ 10:04AM|#

Ron,

Sometime around the turn of the millenia.

|7.17.07 @ 10:09AM|#

I drive a very large pickup truck that gets abysmal gas mileage because I am an environmentalist. As fossil fuel prices go higher, there is a greater incentive to use alternative fuels and a greater incentive to develop new technologies. In my own small way, I am trying to accelerate the transition to alternative fuels... even if it means paying more at the pump and bearing the burden of copious head and leg room.

|7.17.07 @ 10:16AM|#

"Those 50 shares of ExxonMobil that I own are looking pretty good, but they don't make up for the amount I have to pay at the gas pump."

Maybe you could go to the Annual Meeting and ask them to pay the dividend in gallons.

---------

Russ R-

Many people are apparently unaware of the existence of exchange rates and the currency market; when I point out the likelihood that oil prices are high because the dollar is in the tank, I get a lot of blank stares.

robc|7.17.07 @ 10:17AM|#

P Brooks,

What would the price of oil be if we hadnt left the gold standard?

|7.17.07 @ 10:24AM|#

I belive part of the high prices are the lack of property rights in the producing countries.State controlled industy has little insentive to invest in new and better technology or eliminate waste or corruption.Most thrive on both.Can you imagine if the major food producing countries[U.S.A.,Canada,ect]used this model of goverment?What do you think the would price of grain would be?Food prices now are artifically high due to goverment subsidies.Imagine if goverments owned the farms.I think that's been tried [USSR] and millions died.

|7.17.07 @ 10:28AM|#

Nineteen cents per gallon, I reckon.

robc|7.17.07 @ 10:30AM|#

answering my own question, current price of gold $666/oz
oil: $74/barrel

price of oil in gold: .111 oz/barrel

gold was fixed at $35/oz until 1971, using that - oil would be $3.89/barrel

|7.17.07 @ 10:31AM|#

"What would the price of oil be if we hadnt left the gold standard?"

On the gold standard, the dollar was pegged at 1/35 oz of gold... or $35/oz. Today the price of gold is $665 and a barrel of oil goes for $75

$75/bbl * $35/$665 = $3.95/bbl

|7.17.07 @ 10:40AM|#

And, in other "meaningless numbers" news, the DJIA has touched 14,000 this morning. What would it be if Laclede Gas Light and U S Leather were still in the Index?

|7.17.07 @ 11:32AM|#

P Brooks.

Interestingly you get 19.5 gallons of gas from a barrel of oil so the math works out at about 20 cents a gallon -- good guess!

Actually since you get other stuff:
42 gallons per barrel makes about 19½ gallons of gasoline, 9 gallons of fuel oil, 4 gallons of jet fuel, and 11 gallons of other products, including lubricants, kerosene, asphalt, and petrochemical feedstocks to make plastics. That adds up to more than 42 gallons because of something called "refinery gain" - the processing and chemical changes increase the volume.

It would be less.

And yes I take your point about the uselessness of those numbers I was just interested.

|7.17.07 @ 12:44PM|#

gold was fixed at $35/oz until 1971

On the gold standard, the dollar was pegged at 1/35 oz of gold... or $35/oz.

For only the most generous and oppressively mandated definitions of 'fixed' and 'pegged'...

The last time the dollar had any actual relation to the price of gold was when it was $20/oz in the 1920's.

oh boy|7.17.07 @ 12:48PM|#

Looks like someone needs to get their ass down to Venezuela and see whats actually going on instead of relaying on their corporate elite media .This is such a factually flawed article it reads like something lifted straight off the Miami Herald.

|7.17.07 @ 12:59PM|#

"Looks like someone needs to get their ass down to Venezuela and see whats actually going on instead of relaying on their corporate elite media .This is such a factually flawed article it reads like something lifted straight off the Miami Herald."

I could be wrong, but it looks to me as if somebody posted his comment in the wrong tab.

And I prefer the Big Mac Index to the gold standard.

Carl LaFong|7.17.07 @ 1:17PM|#

We are a nation of morons. The answers to our energy problems are right at our feet. If we switch over to diesel, via tax incentives, etc. we can drastically reduce consumption and our dependance on these nutjob countries. The coal supplies in Wyoming and the biodeisel capacity of US agriculture are sufficient to make us near energy independant. We can make food into energy, but they can't make energy into food.

Mark S.|7.17.07 @ 1:18PM|#

Actually the peak in world oil production PER CAPITA was reached in the early 1980s. Since then, while world oil production has continued to increase, it has not kept up with the growth in world population.

That's the real crux of the matter. New oil reserves are getting harder to find, and the cost of recovery continues to increase. Combine that with the increased demand from a growing world population, and the picture for the future should be obvious.

robc|7.17.07 @ 1:20PM|#

The last time the dollar had any actual relation to the price of gold was when it was $20/oz in the 1920's.

I agree with MikeP. Oops, wrong topic. Anyway, I google searched for that, but all I could find was the $35/oz Nixonian price so I went with it.

|7.17.07 @ 1:33PM|#

You could go with the current "official" price of gold. When the US Mint produces a 1 ounce coin, it values it at $50.

|7.17.07 @ 1:37PM|#

...but it charges $750.

|7.17.07 @ 2:15PM|#

Geez if you mean by "bribing their people", providing healthcare, education, etc. then yes I guess they are stupidly offering bribes...This is an amazingly stupid article. The whole point in oil nationalization is to allow the people these countries you think are so pathetic to actually benefit from a resource that belongs to THEM and they are selling to US...my god, apparently everyone in the world is supposed to run their economies to benefit the United States...maybe we should bomb them and take their oil reserves?...oh wait...we are already doing that!

|7.17.07 @ 2:30PM|#

James: Just how will oil authoritarians continue to supply healthcare, education, etc. when their oil begins to dry up (as it already is in Iran and Venezuela--neither can meet even their OPEC approved quotas now)because they broke their contracts with private companies and can't get anyone else with technical expertise to invest to produce more. Underinvesting in oil production will REALLY help the poor.

How about trying to create a real economy instead of one dependent on a single non-renewable resource? Oh, wait, that would take things like the rule of law, property rights, honest bureaucracies, honoring contracts, a free press and so forth.

Anonymous Bastert|7.17.07 @ 2:36PM|#

I nominate James for thread loser.

|7.17.07 @ 2:46PM|#

James - there's been some redistribution of the oil windfall, esp in Venezuela (give Chavez his due), but in every oil-rich nation with sh*tty governance the majority of the cashflow ends up in offshore numbered accounts, Putin's Russia being a spectacular example. Corruption under Yeltsin was bad, but it's become-- almost unbelievably-- many times worse under Putin's FSB crony regime.

The most visible result is that Russia's grand legacy of unrivalled brilliance in math and science education and basic math and science research, a legacy built up over many generations, has been destroyed in the space of barely a decade. It would take an honest and competent Russian regime, should one emerge in our lifetimes, decades to recover even a reflection of that lost brilliance.

|7.17.07 @ 2:50PM|#

Nonsense, the way to really destroy these developing nations is to eliminate economic democracy and rule them with through large TNCs which suck the wealth out of the ground and leave you once they can find a cheaper opportunity. And if you are calling Venezuela's president Chavez a dictator you might want to remind yourself that he was elected twice in monitored elections (unlike Bush who was MAYBE elected once in this country). I can't think of many people around the world who would trade democracy for corporate rule.

|7.17.07 @ 2:51PM|#

Oil is dirt cheap now relative to what it's value is (to me anyway). I'm using it while the using is good ! What's with all the whining? The market is just fine. Just keep doing what you're doing, until you can't, then don't. Relax, be happy, and consume ! That's what we're here for...

|7.17.07 @ 2:57PM|#

Absolutely...chew it up spit it out...cheer on the GDP like its your favorite football team...WOOOO!

Anonymous Bastert|7.17.07 @ 3:02PM|#

We can either let James keep digging his hole or we can destroy his whole worldview right now.

I prefer the former, followed by the latter - but later!

|7.17.07 @ 3:12PM|#

In James' world the goverment knows better how to spend money and divide resources than the people.Oil is nothing but black liquid in the ground.An industry is built by people investing their time, money and brains to produce a viable product for profit.I sugest you read more Adam Smith and Milton Freidman.Maybe if the mullahs in Iran had they wouldn't be rationing gasoline in a country awash in oil.

|7.17.07 @ 3:19PM|#

Oooh...Milton Friedman...what an arsenal of democracy!...Hey world dictators right this way...ol' Milton's got some plans for ya...

Ventifact|7.17.07 @ 4:32PM|#

Carl --

Perhaps you don't "believe in" global warming, but on the off chance you are not wasting mental energy keeping that obvious fact at bay consider what a long-term energy policy based solely on coal for electricity would do to atmospheric concentrations of greenhouse gasses. As for biofuel, it would take a quantity of corn feedstock equivalent to the entire U.S. annual yield to switch from petroleum to biofuel.

Ventifact|7.17.07 @ 4:32PM|#

Of course, much of our long-term electrical energy policy is based on coal...

|7.17.07 @ 4:44PM|#

James,What does democracy have to do with it.I'm talking about propety rights and a free market.We're not a democracy,we'er a representitive republic where many rights are concidered so important they are protected from the majority.Democracy in Venezuela is nothing but mob rule.

|7.17.07 @ 5:22PM|#

Sandy says: "Let x be the number of politicians who deplore global warming and argue we must Take Action.
Let y be the number of the politicians who deplore global warming who also decry rising gas prices.

Let z be equal to the number of politicians worth listening to.

This is easily derived:

z = x - y

Empirical work may have some difficulty finding a nonzero integer for z, especially if you subtract n, the number of politicians who are not part of the two major factions in American politics."

I believe a more accurate mathematical statement would be that the Venn diagram of politicians shows no overlap between z and x, with the volume of z approaching a single point.

|7.17.07 @ 5:44PM|#

X ∩ Y ≈ ∅

|7.17.07 @ 5:55PM|#

"Political" diversion of oil revenues to keep the populace quiet and happy isn't all bad, though. You could make a good argument that Nigeria needs more redistribution -- currently, the ruling oligarchs keep most of it, but the pie keeps getting smaller because local rebels are sabotaging oil production -- by as much as 25%, according to a recent report.

A reasonably well-run national oil revenue-sharing scheme along the lines of Alaska's system might do much to calm folks down.

A broader point: when in human history have oil, or other resource prices, NOT been influenced by power politics, and vice versa? The history of petroeconomics is also the history of petropolitics.

joe 3000 Comment Producing Uni|7.17.07 @ 6:25PM|#

You were wrong on global warming and now you are wrong on oil prices. The joe 3000 Comment Producing Unit scoffs at your ability to predict these things and asserts that your financial entanglements are affecting your judgment.

|7.17.07 @ 7:25PM|#

"The new cycle of resource nationalism is bad news"

Yes it's bad news, but the problem is minor compared to the main issue that cheap sources of oil are going fast; simply, the supply is shrinking. Inexpensive portable energy is important especially for our American economy, overall GDP growth will suffer in proportion to an increase in oil prices. Nationalist energy profiteers will only exacerbate the inevitable increase, higher oil prices will damage the American economy regardless.


Note: We can get oil from almost anything, tar sands, coal, hell even corn, the fundamental problem is that these are very expensive ways of getting it.

|7.17.07 @ 8:57PM|#

"James,What does democracy have to do with it.I'm talking about propety rights and a free market."


YES! Now you're talking like an economist! Democracy has everything to do with it...despite claims to the contrary unrestrained free-market-fundamentalism is very much a socializing system...ask any of the nations subject to the IMF and World Bank (Two highly authoritarian and undemocratic organizations) and they will agree. Legitimacy comes up from the people not down from God or the corporate elite...this is probably where we differ. As for unrestrained mobs...you might ask the Venezuelans about the 2002 military coup which immediately dissolved the judiciary and parliament...Disolving democratic institutions tends to go hand-in-hand with corporatism and rule by the business classes.

|7.17.07 @ 9:03PM|#

We have to remember that of course the problem is not that we are going to run out of the last drop of oil, but that the EROEI (Energy Return on Energy Investment) will become prohibitive. It is unlikely that much oil will ever be produced from shale or oil-sands because it takes nearly as much energy to refine that oil for use as is produced by it...the ratio is just barely over 1.

|7.18.07 @ 3:11AM|#

HMMMMMM........

|7.18.07 @ 3:13AM|#

A portion of our current price rises are due to the excess dollar liquidity that's keeping the markets propped up. But refineries have been running flat for a almost a decade, and I haven't heard any plans for building new ones anywhere except in Russia. Oil demand is not elastic, lots of us have no choice but to drive to work. Oil companies have no incentive to increase gas production, every year their returns get greater on infrastructure investments that depreciated off their books years ago. It's comparable to Enron taking capacity offline for "maintainance" on the hottest day of the summer, the profit maximization strategy means walking a fine line between the highest price and rolling blackouts.

Blaming dictators is a red herring, If Iran did get its act together and invested in its infrastructure, besides having gas, they might start producing petrochemicals and fertilizers. They might see oil as the source for their value added industries, and restrict shipments of crude, If I was running the place I wouldn't let a drop of crude leave. We'd still be filling our tanks but Exxon wouldn't be making squat. Think they are going to let that happen? Regional instability adds value to their product. If the oil can be kept flowing we wouldn't care if the locals were gutting each other with sharpened spoons, as long as didn't include the Israelis.

Oil isn't produced, it's extracted, it's taking money out the bank. What if China acted militarily to ensure that the majority of U.S. capital gains were directed toward consumption so as to guarantee their export levels. Demanding other countries to increase the rate of oil extraction is the same thing.

As for oil reserves, I would reach for the salt shaker, nobody but Saudi royalty has seen raw confident data on their fields since the early 50's. Iraq is just hopeful speculation at the moment. And a recent report stated that it required 20% more BTUs to make a gallon of ethanol than were in the gallon.

Perhaps the 2 trillion dollars that will eventually end up evaporating in the Iraqi sun would have been better spent on ramping up production of 3rd generation nickel-cadmium batteries for cars like the ones GM repossessed in CA. Or a safe and reliable system for storing and managing nuclear waste (it's not just radioactive, it's poisonous as hell). There might even be some money left over for fusion research and basic physics.

Interesting commentary can be about liquidity, oil and gold can be read at the blog of the Cunning Realist, a contributer to the American Conservative.

//cunningrealist.blogspot.com/search?q=excess+liquidity

|7.21.07 @ 4:21AM|#

Jason,

"According to the laws of economics, when the price of somthing rised, more people produce it, bringing the price down; thus, mathmatically we can never run out of oil, the supply is infinite."

Capitalism has done a lot of good for the world and I like the free market as much as anyone (but I don't practically worship laiseizz-faire capitalism like a deity like a "true" libertarian). But I'm sorry to break it to you that physical reality always trumps economic reality.

No economic theorizing, think tank pronouncements, or free market rhetoric can override the basic laws of physics. The "invisible hand" of the market can't create resources out of thin air. Abundant oil is what makes the current industrial free market (and our entire civilization) as we know it today possible, and NOT the other way around. I hope we can transition to alternative energy sources in time but we can't simply wait around doing nothing while and hoping some economic theory will magically save us.

|7.21.07 @ 4:40AM|#

James,

Well the answer is of course in libertarian ideology (theology?) government interference/regulation of any kind is always wrong, and everything will be wonderful and all our problems can be solved by the free market. To suggest that we're screwed if we do nothing and that we may have a problem if we let things continue as they've been would be to invalid something one believes in. And these days no one's (whether GOP, Democratic, etc) interested in looking for answers or actually having to adapt in some way, because it's more fun to just sit around and brag about how smarter and better you are than everyone else.

Unfortunately the bottom line of this is that no, the core reason for continually rising oil prices (beyond temporary fluctuations) is not because Cesar Chavez type socialists are greedily hoarding their country's resources when they rightfully belong to Exxon-Mobil. It's not because of some currency difference or that we the oil industry needs more capital or the "libruls" just hate America and want to stop the economy. The problem is oil's a finite resource that's running out, and the only solution is to develop replacements for it before it's too late.